Awards for Excellence 2016
|
|
Also shortlisted: UBS |
The post-crisis overhaul of the banking industry has affected every aspect of lenders’ balance-sheet management, risk controls and business models. In some cases, regulators and supervisors have, either through edict or moral pressure, forced bankers to allocate capital to favoured markets and clients while micro-managing lenders’ assets and liabilities. What unites the various regulatory initiatives over the past seven years is the attempt to simplify business models in order to reduce perceived systemic risk.
The transformation of Lloyds Banking Group is a dramatic illustration of this. From pulling out of foreign markets and investment banking, cleaning a toxic loan book, transforming its liquidity and capital base and delivering on key financial milestones, Lloyds is the winner of Euromoney’s inaugural award, given to institutions that demonstrate an ability to meet disruptive regulatory changes.
Chief executive António Horta-Osório has achieved a rare feat among his peers by implementing a clear strategic vision, first sketched out in 2011, to restore the bank to profitability and return taxpayers’ money; all in keeping with the new regulatory regime.
The numbers tell the story. In 2015 the UK government’s stake in the group was reduced from 24.9% to around 9% – returning a further £8 billion ($11.6 billion) to the taxpayer at a profit and bringing the total returned to £16 billion.
|
|
António Horta-Osório, |
Reflecting Lloyds’ perceived status as a low-risk institution – a simple UK-focused retail and commercial bank – its CDS spreads earlier in the year were one of the lowest in the world, as it continues to de-risk and improve it capital strength. The group’s underlying return on average shareholder equity increased in 2015 to 14.2%, against a UK peer average of 5.5%. The year also saw underlying profit increase 5% to £8.1 billion and risk-weighted assets fall by 7% or £17 billion.
Lloyds has also increased its equity base above the regulatory minimum. The group’s common equity tier-1 ratio increased in 2015 from 12.8% to 13.9% (pre-dividend) and its leverage ratio is a comfortable 4.8%. Crucially, the group’s cost-to-income ratio, already the lowest in the industry, improved further to 49.3% in comparison with an average of 56% for its global peers.
The group’s liquidity position has improved dramatically compared with the crisis-era days where it was reliant on short-term wholesale funding. At the end of 2015 its liquidity coverage-ratio eligible assets represented almost 5.7 times its money market funding with a maturity of less than one year, while its liquidity stockpile was greater than total wholesale funding, offering a buffer in the event that credit markets seize up.
Lloyds’ progressive dividend policies, sustainable funding profile and investment in digital capabilities – £1 billion over the past five years – have also endeared the institution to brokers.
Macquarie, for one, is impressed: “UK retail banking faces one of the most exciting and challenging times in recent history. Digitization, new payment systems, new entrants, etc, present a combination of opportunities (broadly cost) and threats (broadly income) unimaginable for most of the last 20 years. Against that backdrop, all credit to Lloyds management who have expertly delivered on a strategy of maximising short term returns – no doubt a major help to the UK government exiting their investment (10% remaining).”
Lloyds has been a strong performer in UK stress tests and will easily meet new ringfencing and minimum requirement for own funds and eligible liabilities (MREL) requirements, thanks to its conservative business model and funding structure.
Matthew Elderfield, head of compliance at Lloyds, points to progress in beefing up the bank’s risk-management framework to meet requirements on credit, market and operational risk: “We have invested to create a simple UK-focused bank, disposing non-core assets and our investment banking capability. The disposal of the TSB stake to [Spain’s] Sabadell involved a number of regulatory challenges, not least internal risk-management and IT hurdles,” he says.
Elderfield, a former deputy governor at the Central Bank of Ireland, adds: “Stress-testing of financial institutions is now a de facto binding restraint for all banks and a key prudential tool for regulators. We passed this test thanks to fundamental improvements to our business model and risk management and our lack of geographic complexity. We have done all this while delivering sustainable returns with a low cost base.”
Lloyds is not quite out of the woods; there are still legal and legacy-asset costs, including those from the mis-selling of payment protection insurance, to address. A post-Brexit economic downturn in the UK could expose the bank to reduced client activity and higher impairment costs. Still, it would be wrong to overstate the risks. The average loan-to-value for its mortgage book, for example, is 46%, suggesting that if house prices were to fall even up to 30%, the bulk of Lloyds’ mortgage holders’ could ride out the storm.
